Originally published in Private Client Practitioner, Guernsey supplement, November 2008
In July 2008 a new companies law came into effect on Guernsey. This brought with it a number of advantages for private clients.
The Companies (Guernsey) Law, 2008 (the law) came into effect on 1 July 2008.
The new law introduces a modern company incorporation and registration system (registry) replacing the role that the Greffe and the judiciary played in the process of incorporation and the maintenance of company records since the nineteenth century. The Registry is overseen by the Registrar of Companies (Registrar).
The law codifies and consolidates existing good corporate governance and best practice, increases the flexibility of the Guernsey company for private client structures and has introduced new responsibilities for directors and administrators.
The Incorporation Process
Under the law, companies can only be incorporated by "corporate service providers" (CSPs) which is any entity that holds a full fiduciary licence issued by the Guernsey Financial Services Commission (GFSC) pursuant to the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000. The CSP is required to fulfil the "pre-vetting" functions which were previously carried out by the GFSC and Her Majesty's Procureur (the local Attorney-General) and must ensure compliance with the requirements of the law prior to incorporation.
The incorporation process has been streamlined and modernised. The process which previously required Advocates of the Royal Court to apply to the court for incorporation of companies, once the GFSC and Procureur had given their consent, can now be done electronically via the Registry's website (www.guernseyregistry.com). Depending on the price paid, the whole registration process can be completed within 24 hours (£100), 2 hours (£350), or, for standard limited liability companies, 15 minutes (£750).
The law now permits the incorporation of single member companies and has introduced a standard set of memorandum and articles of incorporation (articles). All companies are deemed to have adopted these articles unless bespoke memorandum and articles are filed with the Registrar.
All Guernsey companies (other than those that are listed, supervised by the GFSC or open or closed ended investment companies) must have a "resident agent" in Guernsey. The resident agent is either the CSP or the Guernsey resident director of the company and is required to keep a record of those holding more than 10 percent of the beneficial ownership of the company or such information as is required to identify and describe the class of individuals who are beneficial owners. The latter requirement means that a company which is owned by, say, an employee benefit trust is only required to ascertain the class of beneficiaries rather than each individual beneficiary.
The information retained by the resident agent will not be in the public domain but will be available to specified regulatory or law enforcement agencies. Guernsey is committed to a practical, yet responsible approach, to the need to know who does business in the Bailiwick.
The changes that concern directors, aim to provide codification and clarification of appointments, eligibility, discontinuation of office and meetings. All directors of Guernsey companies need to become familiar with the new regime. Additionally, companies will be precluded under the law from exempting from liability or indemnifying any of their directors in respect of any liability for negligence, default, breach of duty or breach of trust in relation to the company, although companies will still be able to purchase insurance for their directors in respect of such liability.
Indemnities in relation to claims against the directors by third parties remain largely unchanged. Power is given to companies to avoid transactions in which a director is interested, where that interest has not been declared, unless the transaction is ratified by the members or fair value has been received by the company.
Existing indemnities which may not comply with the law will remain valid and enforceable until 1 July 2009. CSPs and their clients are encouraged to review their current indemnity provisions contained in articles or stand alone director's contracts to ensure compliance before that date.
Dividends and distributions
The law has adopted a solvency model as opposed to the capital protection model which was widely regarded as outdated and inflexible. Under the solvency model the protection of members' and creditors' rights is achieved in a more practical way by requiring directors to consider and certify, prior to any distribution of the assets of the company, that the company will be solvent after the distribution has been made. Under the law distributions will include such things as dividends, reductions in capital, share buybacks and redemptions. In practice this makes the use of Guernsey companies much more attractive in, for example, private client structures where previously dividends could only be made if there were profits available. This often meant that in an investment company it was either necessary to fund the company via loans or by creating a class of redeemable preference shares in order to be able to extract value. The new regime makes the process of returning value to the shareholders much more straightforward.
The law obliges CSPs and/or directors to approve compliance and solvency certificates in respect of certain corporate actions. These together with enhanced notification to the Registry of changes to the company are common themes in the law. Any additional administrative requirements are, it is intended, counterbalanced by easier practical application through the new Registry. The "self regulation" by companies is balanced by provisions relating to third party service providers. For example, auditors have been given new rights to investigate companies, receive notice about company resolutions and meetings and rights to protest their removal as auditor.
Annual general meetings and accounts
Members holding 90 percent of the company now have the right to (i) waive the requirement to hold an AGM either over a specific period or on an indefinite basis and (ii) waive the requirement for the company to have its accounts audited for the forthcoming financial year (subject to certain conditions).
These provisions will take the administrative burden off of special purpose vehicles or closely held companies which it is expected will make administration in Guernsey more cost effective.
Takeovers and schemes of arrangement
Completely new to the law is the introduction of "squeeze-out" provisions, whereby members with 90 percent of the share value are able to give notice to acquire the remaining 10 percent. This is a right that exists under English law and has always been dealt with in Guernsey by inclusion in the articles of association. As such this is more of a formalising of the current practice. UK style schemes of arrangement or reconstruction have also been introduced subject to a specific voting threshold and court sanction.
The new online Registry, the fast track incorporation process and the new solvency based regime for distributions or dividends keeps Guernsey at the forefront of fiduciary services. 2008, has seen the introduction of new legislation covering both trusts and companies. 2009, will see the introduction of Guernsey Foundations. The legislature in Guernsey remains committed to providing a platform from which the Island's administrative expertise can continue to flourish.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.